Moyo Limited is considering investing in a Packing Machine. The investment will cost Moyo Limited R900 000.
Question:
Moyo Limited is considering investing in a Packing Machine. The investment will cost Moyo Limited R900 000. The economic lifespan of the project is expected to be 5 years with a zero residual value at the end of the period. Depreciation is calculated using the straight-line method and the current cost of capital is 11%. The companies accounting profit over the 5 years are R60 000, R90 000, R70 000, R100 000 and R80 000 respectively for each year.
Required:
3.1 Calculate the accounting rate of return. (Correct to two decimal places)
3.2 Calculate the payback period. (In years and months.)
3.3 If a payback period of 3 years is required, will the project be accepted? Why?
3.4 Calculate the net present value. (Amounts to the nearest Rand)
3.5 Based on the NPV will the project be accepted? Why?